Upstart Holdings (NASDAQ:UPST) stock presents a conundrum for investors. On the one hand, they have seen UPST stock drop by more than 75% since mid-October. That’s scary.
But Upstart Holdings is also a strong company operating in a burgeoning financial technology (fintech) space. That’s very promising. The company uses artificial intelligence (AI) in its lending decision process.
It has done well by most accounts. Its latest earnings report was particularly strong. The problems it has relate to the structure of the markets rather than the company itself.
When a company performs well but gets dinged by forces outside of its control, there’s often an opportunity. That seems to be the case here with UPST stock.
Rising Interest in UPST Stock
Upstart Holdings is a disruptor in the fintech world. Small and medium-sized banks generally use bankers to determine credit worthiness and the ability to secure a loan. Upstart Holdings does this through artificial intelligence.
This is a gamechanger, and it is catching on. The company could disrupt many other valuable loan sectors as well. This includes auto finance, which is already large and predicted to grow at nearly 6% annually through 2027.
Whichever areas it disrupts, the point is that it is doing so profitably, which is garnering it attention. If you do something cheaper — like automate expensive bankers out of loans — and do it profitably, investors will take notice.
So far, that’s exactly what has happened. Wall Street took interest, investors took interest and UPST stock hit very high highs in 2021. But both investors and Wall Street took notice of rising interest rates as well. That has triggered a steep decline in Upstart Holdings.
Call it an overreaction or whatever you like, but Upstart remains strong. Its fundamentals point to a fintech company worth considering. It has been punished along with most growth stocks due to the current environment, but don’t lose faith.
Upstart Has Fundamental Strength
The company’s Nov. 9 earnings report tells a story which is more important than Federal Reserve decisions and interest rates. Before getting into the numbers, Upstart reported in Q3 simply consider why its business model is so powerful.
When you want a loan, you go to a human lender. That person considers your employment history, credit, expenses, education and transactions in totality. Then, they make a decision. That can be subjective and costly. But AI, which automates that process, is cheaper and also adapts quicker through data points fed into its algorithm. It is arguably less subjective.
That resulted in a very strong Q3 for Upstart Holdings. Revenue increased 250% year-over-year, reaching $228 million in the quarter. Net income rose by 200%, reaching $29.1 million. That’s testament to the power of fintech and AI in the banking sector.
But even though the company did very well, it actually didn’t matter from the perspective of price. When it released those earnings figures on Nov. 9, UPST stock was already on the way down. Interest rate woes had already spooked the market. Investor capital had already initiated its flight from growth stocks.
What to Do With UPST Stock
Here’s my problem: The market is treating UPST stock as if the company failed or that it was a common growth stock. What I mean is that common growth stocks often report big losses. They are attractive because they also have strong revenue growth, enough that investors are willing to overlook losses.
But Upstart didn’t post losses. It posted $29 million in net income in Q3. And it posted strong revenue growth rates and total revenue. That pattern should continue in Q4, and the firm expects $16 to $20 million in profit.
At the end of the day, Upstart Holdings has hit a bump in the road that it will overcome. There’s an opportunity there that is quickly emerging as the market sorts out tech again.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.
